Archive for September, 2012

When it comes to tax problems, individuals are not the only ones who suffer. Many businesses are dealing with tax audits and tax debt problems too. In fact, the IRS estimates that small businesses are responsible for around 80% of the $450 billion tax gap.

Cracking Down

In order to better regulate small business tax reporting, the IRS conducts audits for businesses. Predicted to be one of the largest sources of under reporting on taxes, small business owners may soon face tax audits looking to comb through their financial details. The IRS may soon be focusing on several areas:

Fringe benefits — such as sick time, company bonuses, personal use of company vehicles or properties, and company credit card charges.

Small business credits –such as deductions for health insurance premiums and medical expenses.

Form matching –such as 1099-K, Form 1065, 1120S, 1120 and Schedule C forms.

It is important that businesses and individuals keep all income, deduction and loss related documentation organized, especially in the even a tax audit is in the future. Small businesses should use professional accounting software or a service to ensure all financial information is categorized and tracked on a consistent basis. Keep all business related receipts and follow the IRS’ rules for deductions and write offs in IRS publication 463, to minimize problems with questionable tax return in the future.

Even in the wake of the foreclosure crisis, many homeowners continue to struggle with mortgage debt. While the government has taken some initiative to help families save their homes and reduce their debts, another issue still lurks around the corner. A special mortgage debt assistance exemption is set to expire at the end of this year, which could leave many owing taxes on their aid.

Non-Taxable Income

The Mortgage Forgiveness Debt Relief Act was passed in 2007 and allows taxpayers to exclude income from the discharge of debt on principal mortgage loans. In other words, if a lender reduces the amount owed on the loan for a borrower, this money is generally considered “income”. Under this act, the “income” is not eligible for taxation, giving homeowners a break from an increased tax liability.

As we enter the fourth quarter of the year next month, many are growing increasingly concerned about the fate of this bill. If it is extended, homeowners will continue to receive much needed assistance, but could cost the national budget. If the bill is cancelled, it could boost our national financial position, but cost homeowners hundreds or thousands of dollars in added tax liability. The concern is that homeowners already experiencing financial trouble will end up further in mortgage debt, personal debt, with an added problem of tax debt.

Although tax season is long gone this year, tax debt collections are just now beginning. If you owe the IRS money, don’t avoid them. Instead, contact them right away to discuss one of the following options:

Installment Plan — is a repayment option that allows you to repay your back taxes in a series of smaller payments. The average installment plan will spread out payments over the course of two to three years. This program is only available for tax bills less than $25,000. In some cases, penalties and interest may still be added to the total tax bill.

Offer In Compromise — is a type of IRS debt settlement, in which the IRS may allow you to pay less than is owed. This program is available for those experiencing a significant financial hardship. OICs can be difficult to obtain and may require that the reduced tax bill be paid in full.

Currently Not Collectible— is essentially a forbearance agreement between you and the IRS. When your tax debt is “currently not collectible” you are given a temporary break from the payment requirement. In other words, you do not have to pay for a specified period of time, at which your debt will become collectible and expected to be paid.